Finance Minister Nicola Willis

Treasury’s first report on the economy since the change of government presents a damning indictment of Labour’s economic management.

The problem for National is that it is so damning that logically,  coupled with a rapidly slowing economy,  Finance Minister Nicola Willis should respond to it by postponing or even cancelling the party’s promised tax cuts.

Former ACT leader Richard Prebble is the latest in a growing list of centre-right figures arguing that the time for tax cuts is not now.

But National seems to believe that to cancel the cuts now would open It up to questions about broken promises and therefore challenge its political credibility.

And as is often the case in the Beehive, politics trumps economic logic.

Nevertheless, the Treasury’s situation report on the economy, outlined in a paper it produced to accompany the Minister’s Budget Policy Statement, is stark.

“Between 2016/17 and 2023/24 (forecast), core Crown expenses have grown 84 percent, compared to a 52 percent increase in nominal GDP and a 66 percent increase in core Crown revenue,” it said.

“Budget operating allowances over the last four years – Budgets 2020 to 2023 – have averaged around $4.5 billion compared to $1.4 billion between 2010 and 2019, and a considerable amount of spending was done outside of allowances.

“The structural increase in spending means that the government would be in deficit – and would need to borrow to cover this deficit – even if the economy was operating at full capacity. This is not sustainable.

“Fiscal consolidation is required over time to bring revenue and expenses back into balance.


“Tight fiscal policy in the near term will also support monetary policy to bring inflation within target and maintain it there.”

National’s election manifesto promised tax cuts it estimated would cost $3.1 billion next year. The cuts would increase after-tax pay on 1 July 2024 by: 

  • Shifting income tax brackets to compensate for inflation
  • Expanding tax credits to reach more modest income earners
  • Introducing the FamilyBoost childcare tax credit
  • Increasing Working for Families tax credits for working families (from 1 July 2024)

The cuts were supposed to be self-financing with a new tax on foreign home buyers and increased tax revenue from gambling and other taxes. Money would also come from cutting government spending. And from sources like Emissions Trading Scheme auctions

The foreign buyer tax went with the coalition agreement, and the ETS revenue looks questionable because of the surplus of ETS units on the market. Inland revenue has questioned the revenue estimates from other taxes, and the cost cuts may now be needed to support the overall budget revenue-spending balance.

It is little wonder then that the former ACT leader, Richard Prebble, yesterday was the latest in a line of figures from the centre-right calling for the government to either postpone or cancel the tax cuts.

“Economic credibility is Luxon’s greatest asset. If he throws it away, he will never get it back,” he wrote in his NZ Herald column.

“Luxon must tell his Finance Minister and coalition partners that the country voted for sound economic management. If that means the tax cuts and other policies must be delayed, so be it.”

What is troubling Prebble and Treasury is an economic slowdown that has been evident in statistics since the beginning of this year and is deeper than anyone had expected.

That will impact tax revenue.

In its Budget Policy Statement paper yesterday, Treasury forecast that core crown tax revenue would be $13.9 billion lower in the years up to 2028/29 than it had forecast as recently as December last year in the Half Yearly Economic and Fiscal Update.

The net result is that the return to surplus is being pushed out further. In part that is becxaue of the slowdown and in part because of the previous government’s spending.

Less than a year ago, in last year’s Budget Economic and Fiscal Update, Treasury was forecasting a return to surplus in 2025- 26. By December that had slipped to 2026-27 but yesterday Treasury did not offer an update.

“The scenario does not present updated fiscal forecasts,” the Treasury document said.

“Complete fiscal forecasts depend on information yet to be collected from a range of government entities and on Budget 2024 decisions yet to be made.”

Obviously, the Finance Minister is closer to those “decisions yet to be made”, and she was pessimistic about the likely path for the OBEGAL (Operating Balance Before Gains and Losses)

“Let me emphasize that these tax revenue revisions don’t include or anticipate any government policy changes in tax or in any other area,” she said.

“This is just simply the situation created by a down turning economy that any government would have faced.

“A bit of mental arithmetic indicates that on these particular forecasts, achieving a surplus in 26/27 is almost certainly not achievable.

“A surplus in 27/28 is still achievable, but not a given.”

Commenting on the surplus projection, ANZ Chief Economist Sharon Zollner said that under the last government, the forecast return to surplus was repeatedly pushed out as big spending increases became commonplace.

“We wouldn’t be surprised if the weaker economic outlook causes the return to surplus to be pushed out another year in the upcoming budget. (to 28/29).

“If so, that would mark eight years of consecutive deficit following the pandemic and cyclone Gabrielle, two years more than following the Global Financial Crisis and Canterbury earthquakes.”

Zollner concluded that although the tax cuts would likely be fiscally neutral, whether they were “economically neutral” would be a question the Reserve Bank would need to consider.

She floated the possibility that the tax cuts might not be inflationary “if a large enough share of the tax relief is saved or spent on imports, and public sector redundancies from spending cuts outweigh the positive indirect employment impact from slightly higher-than-otherwise household demand.”

 “If this is the way it pans out, a “fiscally neutral” package could mean the Reserve Bank is in a position to ease monetary conditions a little sooner than currently expected,” she said.

But it is a fine line.

If the government cuts too much, that could see growth plummet; if it leaves the tax cuts to be funded by debt then that would put pressure on inflation and the Reserve Bank.

CTU economist Craig Renney worried that the government was cutting too much.

“The government appears to be acting pro-cyclically – cutting investment and spending at a time when the economy is in the doldrums,” he said.

“This document shows that the government has no plan for sustainably growing the economy or creating good jobs.”

But Willis was adamant that her first priority would be the tax cuts.

“The most responsible thing we can do is to deliver for New Zealanders who have gone through a prolonged cost of living crisis, many of whom are struggling,” she said.

“The most effective relief we can give them is allowing them to keep more of their own money.

“They have had no adjustment to their tax since 2010, and it’s time we remedied that.

“We’re not going to press delay on such an important priority.”

Though she said people would get the tax cuts from July this year,  other Government sources have told POLITIK the timing and quantum of the cuts has not yet been agreed.

Regardless, the tax cuts are fundamental to the Luxon National government’s programme.

“The takeaway is that this government has very clear priorities: tax relief for working people, more money for front-line services, and more effective spending to lower debt and get the books in order,” said Willis.

“ We think this is a balanced and moderate approach that delivers on the things New Zealanders expect from our government.

“They expect and need tax relief.

“They expect and need investment in schools, hospitals, and the police, and they expect and need a sustainable financial footing.

“We will deliver all those things.”

That is a big ask and one that could easily get derailed if the economy continues to slow.

Willis has left the government very little political wiggle room if that happens.